More often than not, the course and success of a business rescue will be decided by a folder of digital files signed years ago when the distressed entity was healthy and the fine print was far too cumbersome to read.
Ryszard Lisinski
As quickly as they were signed, these security documents become the not so silent architects of a future business rescue and those involved have to think outside of the box to tame these wild and demanding beasts.
Much like the wild beasts in a zoo, each of these security documents come with their own unique ability to inflict pain, if not carefully managed. Here’s what you need to know about the main animals in the security zoo.
The security zoo
Every business rescue has a security zoo. Some creatures are harmless. Some are exotic. Some will bite you if you venture too close. Understanding what is in your zoo is the first step to avoid being eaten.
The personal guarantee (The lion)
This is a big one. The sole director has signed an on-demand personal guarantee for the bank’s overdraft and term loans. The bank can call on the director at any time after default.
In rescue, the bank is usually a secured creditor with substantial voting power. The director’s personal exposure creates a challenge; the director may resist a plan that requires personal injection but his only viable option may be to invest to ensure that the guarantee is released.
The lion is in the room and it is hungry.
The bond (The leopard)
The director has mortgaged their house, their car and personal assets to secure company debt.
Alternatively, but usually simultaneously, the same director has allowed notarial bonds to be registered over stock and other moveable assets.
In rescue, this creates an encumbered tight rope which requires the experience and knowledge of the most seasoned experts in the field to navigate successfully.
The leopard is stealthy and it is patient.
The trade creditor suretyship (The hyena)
The director has signed a personal suretyship for key supplier accounts.
When the company enters rescue, those suppliers become post-commencement creditors if they continue trading with the entity in rescue.
This personal exposure influences the treatment of those suppliers and may necessitate the interruption of trade to avoid triggering further personal liability.
The Hyena is circling and it is cackling.
The cession of book debts (The hippo)
This is potentially the most destructive.
A director signs a cession of book debts when times are good but when the vultures start circling and the holder of this security is notified about business rescue, cash stops flowing into the business almost immediately.
This one creditor becomes one of the most if not the most important creditor in the rescue and early engagement and agreement is key.
The hippo seems innocuous but it is deceptively fast and powerful.
The corporate guarantee (The elephant)
This is the least personal but it is just as problematic.
A related company has guaranteed the main company’s debt. In rescue, this creates inter-company complications.
The related company may have its own creditors. The guarantee may trigger cross-default provisions.
The rescue becomes complex, more expensive and less likely to succeed.
The elephant is in the room and it is heavy.
The business rescue practitioner (The zookeeper)
The type of security involved distorts decision-making, creates conflicts and misalign incentives.
There are many creative ways to deal with the animals in the zoo but the best zookeepers combine a few different approaches to achieve the best outcome.
Negotiation and transparency are the logical first steps.
An appointed business rescue practitioner approaches the secured or problematic stakeholder(s) either prior to or after filing for rescue. They explain the situation. They offer whatever assurance they can and if possible, enter into a formal arrangement.
The incentives are aligned and the rescue has a chance. All relevant stakeholders are kept informed and the business rescue practitioner develops a working relationship and trust.
The business rescue practitioner’s reputation and experience play a substantial role in the outcome that can be achieved at this juncture. This developed trust allows the business rescue practitioner to mold the business rescue plan around each stakeholder’s security and requirements.
The bottom line
Security is not just a legal document. If left unchecked and ignored, it is potentially a business rescue killer. Practitioners and supporting attorneys who understand this address all related issues prior to rescue or shortly thereafter. They do not wait for the security to become a problem. They deal with it early and honestly. It is this proactive approach that regularly proves critical to ensuring a successful business rescue outcome.
For company directors, the lesson is a simple one. Don’t wait until there is a problem to find out exactly what you have signed. Know what is in your zoo, be proactive and take advice early on to avoid being bitten.
